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Pennsylvania State University - ECON 443HW3 solutions

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443: Economics of Law and Regulation Homework Assignment 3 Solutions Chapters 6 and 7 These are the solutions to homework assignment #3. Problem 1: Horizontal Merger Analysis and Price-Cost Margins... . An industry consists of six firms. The absolute value of the elasticity of demand is µ = 1, and the marginal cost of production is 25. (a) There are initially six firms of equal size in the industry. The firms compete by choosing quantities simultaneously. What is the price of the good in equilibrium? (b) Now assume that the six firms divide to two groups of three firms each, and each group merges. The result is two firms of equal size. Each merged firm can now produce at marginal cost of 20. The firms compete by choosing quantities simultaneously. What is price of the good in equilibrium? (c) Assume that the aggregate demand for the product is Q = 50 − P. Calculate the surplus (consumer, producer, total) before and after the merger. Based on the total surplus, should the merger be approved? Hint: For parts (a) and (b), you can use the formula P −PMC = nµ 1 , where n is the number of firms. Answer 1 (a) Use the formula P −PMC = nµ 1 to find prices. Plugging in MC; n; µ we have P −P25 = 1 6. ) 6P − 150 = P ) P = 30 (b) Use the same formula again P − 20 P = 1 2 ) 2P − 40 = P ) P = 40 1 [Show More]

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